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11 Comments
Topics: Economic Development, Education, Public Policy

11 Responses to “The End of the Road for Eds and Meds”

1. Josh S says:

   September 13, 2012 at 12:00 pm

   “I can’t see how every city and state in the country could achieve its growth objectives in these sectors – not without bankrupting the country and its next generation at least.”

   This has actually been the trend of the past couple decades–assuming enough debt and future obligations (or at least accounting for them in a way that pushes the obligation to the future) that it will bankrupt whichever generation is around when the debt is called. Fiscal policy that inflates asset prices while reducing interest rates to below 0, an increasing Debt-to-GDP ratio (exponentially more if you consider state, municipal, and other taxing-district debt), and the subsidy of private debt (in education and homeownership particularly) that encourages financial over-extension.

   All of this allows the older, more-entrenched/powerful generation to extract wealth NOW from the future generation(s). And it’s going to kill our kids.
2. Matthew Hall says:

   September 13, 2012 at 4:05 pm

   The end of growth is not the same as actual decline. Even if all growth in eds and meds spending stops, it will still continue to be enormous. How that enormous amount is spend can change and be more effective and have very different effects on the places it’s spent.
3. uffy says:

   September 14, 2012 at 3:50 am

   Were it not for the fact that only a vanishingly small number of countries are better managed than the US I would be awfully worried. As it stands though I’m somewhat hopeful, as basically every human on the planet is now faced with an economic paradigm that seems to have simply stopped functioning which makes an eventual change of course all but inevitable.

   It would be awfully nice if economics as a science had something to offer on this front. The so-called “Great Stagnation” explanation makes little sense in light of the massive unused productive capacity that sits idle in every developed country. The Market Monetarist/New Keynesian explanation seems much too simplistic and at the very least not nearly radical enough. Schumpeterian mal-investment is somewhat compelling but offers no solutions and, besides, it’s pretty hard to point to any major economic sector and imagine how much better off we would be without it.

   What am I missing? Does some theory explain the conspicuous increase in debts of all sorts that seem to be required to achieve further economic growth? What changed between the economic miracle (I mean that sincerely)starting all the way back in the early 1700s and today?

   But yes, highly unaffordable medical care is a disaster that’s only getting worse and is literally bankrupting the entire US government down to the state and local level. The student debt arms race is not much better but at least theoretically can be brought to an end and even reversed with fairly minor changes in policy and behavior.

   This isn’t just an urban issue though by any means.
4. Chris Barnett says:

   September 14, 2012 at 9:47 am

   uffy, this will be VERY broad.

   Go back to Econ 1 and the identity mv=pq. (money supply X velocity of money = price X quantity, a proxy for GDP)

   Money velocity used to be relatively constant, but technology and easy debt has steadily increased it. As information gets better, producers maximize inventory turns to hold less “dead money” (working capital). Households buy not with cash but with credit, requiring not saving but spending monthly to make payments. Note that debt only comes into that equation on the monetary side in aggregate.

   Individuals and firms deleveraging (reducing debt) stops growth because it reduces both the velocity and supply of money simultaneously. People, corporations, and banks hold cash…which slows its velocity. They borrow less, which reduces money-supply growth.

   Thus, what would normally be stimulus or even exceedingly inflationary monetary policy (zero interest rates and massive debt purchases) just keeps things from deflating on the goods and services side. So far, the Fed is doing what it didn’t do in the 1920’s to prevent depression.

   One big recent change is the shift from a goods-based to a services-based economy. Eds and meds are good examples and make up a big chunk of the service economy. But there is no “world price” for a “standard BS degree” or for a “standard appendectomy”, much less for the esoterica of either field. World prices exist for energy, metals, and foodstuffs, and they rise and fall with market realities (and rumors), and they can be stored…all of which is significantly different from services.

   Eds and meds prices do not function in standardized free markets; prices and supplies rise independent of market corrections, fueled largely by cheap debt.

   The brakes on both will be structural and demographic. The largest generation in US history is only halfway into adulthood. Millenials from the midpoint (born in 1991; gen Y = 1982-2000) are now 21 and past prime college age, though many of them have deferred college and professional life to serve in our two wars. As the demographic bulge passes undergrad age, expect some tough times for universities.

   As that generational cohort overtakes the Boomers as voters, there will have to be a GenX-GenY political solution to Social Security and Medicare funding issues, and probably more broadly the issue of old-age healthcare financing (i.e. who pays). Guessing this outcome is well beyond the predictive capability of economists. Sure, they can feed numbers into models…but models don’t typically reflect the kind of seismic political changes that will “fix” healthcare finance.
5. James says:

   September 14, 2012 at 12:09 pm

   There are many ways to view these numbers. One is that demand is strong and supply is constrained, causing a strong rise in price. And while surely prices will not continue to rise at their current rate, neither to current prices dictate future demand or supply. So the question is why hasn’t supply risen to meet the demand?

   Another way to view the problem is one of cartelization. Harvard, the oldest university in America, is very small. Less than 10,000 undergrads. A century ago Harvard was the largest university in America. During the 20s-30s many schools decided to become exclusive rather than inclusive, Harvard being a prime example.

   All of this is to say that I would be cautious about parsing the numbers on education and making any predictions on how this will affect cities. If supply caught up with demand it would entail a huge increase in education employment. Demand could crater, but since college degrees still command a premium over no college that doesn’t seem likely.

   Health care is a mess, and there will probably be big reforms in the next decade in order to bring supply and demand in line with per capita GDP spending. IE reality. Again what that will do to cities is another thing. The number of doctors has not increased significantly over the last 20 years. So you can see how this problem is tied to the education problem.

   The reducted version: price unsustianability does not dictate the velocity of demand
6. Chris Barnett says:

   September 14, 2012 at 1:53 pm

   James, in education the overall rising price does not necessarily reflect unmet demand or constrained supply. This is partly so because the services are not standardized.

   People clearly are willing to pay more for degrees from Ivies such as Harvard, Yale, Princeton, and Penn than from universities with lesser reputations. So, at the top of the market one might expect the Ivies to be raising prices faster than schools with lesser reputations, perhaps even faster than the national average. This would theoretically reflect constrained supply and increasing demand.

   Here’s the test.

   Tuition at Penn in 1980-81 was $6,000 (as far back as I could easily find); today it’s $43,738. That’s an average annual increase of 6.4% per year for the past 32 years…more than double the general inflation rate over that period of 2.98% per year, but LESS than the overall college-price average. I grant that taking out the near-hyper inflation of 1978-80 would raise my number some, but not by enough to bring Penn’s average increase up to the average of 7.74% over the 1978-present.

   [I picked Penn because its general undergrad reputation has gotten better since the 1970's, closing the gap on Harvard, Yale, and Princeton. In most rankings it is a top-10 national university. Its percentage of undergrad applicants accepted has plummeted from more than 40% to something closer to 10%, so it has clearly gotten more selective as its reputation has been rising. Penn reflects a clear case of rising demand and constrained supply at the very top of the market.]

   So on the face of it, there doesn’t seem to be a connection between the perceived market value of an elite institution’s degree and its price increase over the past generation and a half.

   I suspect the key factor in the rising overall “price” mostly reflects the availability of easy loans, and some level of artificial “list” pricing that is different from actual because of “financial aid” (internal discounts and external scholarships and grants).

   It would be interesting to know the rise in actual out-of-pocket costs over that time, but it would be nearly impossible to calculate since education pricing is about like airline pricing: two kids in adjacent seats are probably paying very different prices.
7. James says:

   September 14, 2012 at 6:34 pm

   Chris,

   I don’t quite understand your argument. You are saying that prices don’t indicate supply and demand. But isn’t clear to me why not. I mean I don’t really see what rising tuition at U Penn means for the overall increase in college education. How much did Penn increase undergraduate enrollment in this period of time? How much did applications increase? And how does that compare to the aggregate? How many more applicants have schools seen over the last 30 years and how much has actual enrollment increased?

   If you think increasing loans are the culprit for increasing price and not supply and demand, what evidence do you have for this?
8. James says:

   September 14, 2012 at 7:49 pm

   Chris,

   Reading again, perhaps the trouble is this statement here: “So, at the top of the market one might expect the Ivies to be raising prices faster than schools with lesser reputations, perhaps even faster than the national average.”

   Why would we make that assumption?
9. Chris Barnett says:

   September 15, 2012 at 1:52 pm

   In a high-unemployment environment, and in an environment where more and more job-seekers have the undergrad degree as their credential, one would reasonably expect the perceived value of a top undergrad degree to be higher than one not from a top-10 school.

   So if the value of such a degree is higher than other undergrad degrees, we might reasonably expect more people to apply (which in Penn’s case has happened) and we might reasonably expect a willingness to pay more since the expected value over a lifetime of a top-10 degree is higher.

   So if there exists a rational, value-based willingness to pay more for a Penn degree, the market price ought to reflect that: “the market” should bear (and reflect) a sustained above-average price increase for Penn.

   But that’s not the case, and so we must accept that non-market factors bear considerably on price. Because of concern for undergraduate debt, Penn in the last decade went to a “no loan” financial aid package.

   Now they lean on alumni to donate to undergraduate aid; one vanity incentive is “named” scholarships. But there is a limit to this funding stream, so I’d submit that the donations for non-loan financial aid act as the effective limiter of tuition. But this is not the general case; it is specific to the top schools that have “no-loan” financial aid (price discount) policies because their students’ debts got alarming way before everyone else’s.

   Outside the top-rated and most-expensive universities, the ability (and seemingly unlimited willingness) of parents and students to borrow unsecured money allowed universities to raise costs without losing market share for decades.

   But today there are serious questions about the value of a middlin’ degree and concerns about the ability of graduates in general to ever pay off student loans as a result. Like everyone else, students and parents are trying to de-leverage as a response to the economic conditions. But mid-pack and lower-tier schools don’t have the same endowment or fund-raising capacity as the top universities.

   So the market forces may finally take hold and burst the debt-fueled education bubble, by forcing lower prices so that students don’t have to accumulate so much debt.

   I think my series of lengthy comments here provides some backup for Aaron’s (unstated) assertion that “the boom in higher ed is over”.
10. James says:

    September 15, 2012 at 5:06 pm

    No, I disagree. Tuition is only one mechanism for a school like Penn to increase price. Big name schools are able to become exclusive through high test scores rather than simply high prices. Schools don’t need to raise tuition in order to maximize their value. For example Harvard has the largest endowment of any private school in America. Instead of charging student up front, Ivies are remitted in arrears.

    http://www.usnews.com/education/best-colleges/articles/2011/06/28/10-universities-with-largest-financial-endowments

    Penn may be trying to maximize brand value rather than tuition revenue, and that may be a smart move. Penn may also be a statistical outlier.

    I also see no correlation between rising prices and student loans. In fact the laws have changed to make student loans more difficult to discharge and that did nothing to tame the growth in college costs. And they shouldn’t, because education is still a better value than housing, gold, or stocks:

    http://www.hamiltonproject.org/multimedia/charts/rate_of_return_of_college_compared_to_alternative_investments/

    Again I see no evidence that the run up in prices isn’t due to market forces. Instead it is clearly a result of increased demand that isn’t met by a correlated increase in in supply. Scarcity often results in higher prices. The labor market for people without a college education is abysmal. So the labor market has clearly driven demand for a college degree. News stories are replete with these tales. See the following:

    http://www.npr.org/2012/06/06/154456406/young-adults-without-degrees-struggle-to-find-work

    http://gawker.com/5916191/a-high-school-diploma-is-a-ticket-to-unemployment-and-hopelessness

    So the thesis asserted (if I understand it correctly) in this blog post is that high prices will cause higher ed. enrollment to crash and cities will find economic gains from higher ed. will vaporize. And while I will agree that the price increase in higher ed. can’t continue like this, I stand by my assertions. Price unsustianability does not dictate the velocity of demand
11. Alon Levy says:

    September 17, 2012 at 3:34 am

    A couple things about eds:

    1. Harvard and other top-tier universities charge below-average tuition rates nowadays, counting financial aid. Many of them charge a sliding scale. I think Princeton is the pioneer in this.

    2. At public universities, the cost hasn’t increased much; state support has declined. CUNY tuition used to be free, but New York eliminated free tuition in the 1970s. I saw a chart of total tuition and government support since the 1980s pointing to fairly tame growth in total cost per student – either comparable to inflation or comparable to GDP per capita, I forget which. What’s increasing is the percentage of the population going to college.

    3. At research universities, there is enormous spending with declining marginal utility on brand-name research. This includes bidding wars for famous professors (though their salaries are still in the $300,000 area, far from, say, what the football coaches make) and, more importantly, for rare books, facilities, and art. Yale has an entire library of, I believe, Medieval European artifacts. The idea is that the presence of big-name professors and facilities will draw assistant professors, postdocs, and grad students, boosting research quality.*

    4. The administrative bloat at universities is legendary. There are some exceptions, such as the Columbia and Brown math departments, which run everything with small staff, but central admin departments tend to be huge, bureaucratic, and impersonal. I think everyone who’s gone to a university can tell multiple stories of being sent from department to department in a circular loop.

    5. Similar to point 4, the amount of money spent on non-teaching, non-research duties is quite high. A lot of it is earmarked, e.g. donors giving money to a building named after them. But not all of it is, and some university presidents spend more money on campus beautification (for certain values of beauty, at least…) and athletic facilities than on students.

    * Incidentally, this is one area where transportation and place matter. CUNY was able to establish a good research department out of proximity to Columbia and NYU. Fast, cheap transportation would add more universities to the New York- and Boston-area clusters. Yale would benefit tremendously, but so would RPI, SUNY Albany, Vassar, and everything in Worcester.